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Successor liability issues in labor and employment cases.

As the 21st century roars ahead, there has been no slowing of business mergers, buyouts, other consolidations and sales, and bankruptcies. Of course, these corporate "shuffles" almost always impact the employment relationship in some fashion. As such, employment law practitioners will likely be faced with claims that will require careful analysis of federal common law successor liability theory, which differs significantly from state successor liability "alter ego" or "de facto merger" rules applicable to general business debts and other liabilities. This article identifies the primary cases that discuss when and under what circumstances a successor business entity may become or remain liable to a former or current employee for legal protections provided by the principal labor and employment law statutes, with a particular focus on a current federal circuit split regarding this issue.

As a preliminary thought, it is wise to consider the following words from the Seventh Circuit Court of Appeals: "[T]he issue of successor liability is 'dreadfully tangled, reflecting the difficulty of striking the right balance between the competing interests at stake.'" (1)

Golden State and the Supreme Court's Successor Liability Doctrine

The development of successor liability theory in employment law began with a series of U.S. Supreme Court cases discussing successor liability in the context of labor disputes. (2)

Perhaps the most influential case involving this issue is Golden State Bottling Company, Inc. v. National Labor Relations Board, 414 U.S. 168 (1973). This case involved a labor dispute where a driver/sales employee was discharged by Golden State Bottling Co., Inc. (predecessor) for allegedly engaging in protected union activities in violation of provisions of the National Labor Relations Act (NLRA). The National Labor Relations Board (NLRB) found in favor of the employee and ordered Golden State and its "successors and assigns" to reinstate the employee with backpay. After the litigation concluded, Golden State sold its entire bottling business to a company named All American Beverages, Inc. (successor). Subsequent to both the finding of liability and the sale of the business, the employee initiated a backpay liquidation proceeding before the NLRB against both Golden State and All American. The NLRB decided that All American was a successor in interest and that it was required to reinstate, or maintain reinstatement of, the employee absent a justifiable reason for termination and be jointly and severally liable with the predecessor Golden State for payment of the backpay award. The Ninth Circuit upheld the NLRB's finding which was affirmed by the U.S. Supreme Court. (3)

The Supreme Court addressed All American's argument that Fed. R. Civ. P. 65(d) barred enforcement of the NLRB's order of reinstatement as to a successor such as itself. The court rejected the argument and held that "a bona fide purchaser, acquiring, with knowledge that the wrong remains unremedied, the employing enterprise which was the locus of the unfair labor practice, may be considered in privity with its predecessor for purposes of Rule 65(d)." (4) Moreover, the court determined that an NLRB finding of a "continuing business enterprise" is necessary to establish privity between a predecessor and successor for purposes of Rule 65 and the imposition of injunctive remedies against an "innocent" successor such as All American. The court also imposed certain due process conditions precedent to an NLRB finding of successor liability, including the requirement of an evidentiary hearing, after adequate notice, on the issue of successorship and/or on the enforcement of any order issued against a purported successor. (5)

After a review of previous successor cases in the context of labor relations along with public policy justifications for imposing liability on successors, the Supreme Court reiterated the importance of advance notice to the successor of the potential liability so that the successor may negotiate with the predecessor concerning the sales price of the business, or determine whether an indemnity clause is appropriate. (6)

Golden State Analysis Extended to Employment Cases

The year after Golden State was decided, the Sixth Circuit was the first to extend successor liability theory to a Title VII case in EEOC v. MacMillan Bloedel Containers, Inc., 503 F.2d 1086 (6th Cir. 1974).

In MacMillan, an employee filed charges of race and sex discrimination under Title VII with the EEOC against her employer Flintkote Company (predecessor). During the EEOC investigation and conciliation process, MacMillan Bloedel Containers (successor) took over operation of the predecessor's office where the employee was working. After the conciliation process failed, the EEOC initiated litigation against the successor MacMillan. (7)

MacMillan filed a series of dispositive motions, the thrust of which was that the employee never named it as the successor in the EEOC administrative charge and, therefore, the trial court lacked subject matter jurisdiction over the claim. The trial court agreed and granted summary judgment in favor of MacMillan. (8)

On appeal, the EEOC argued that MacMillan was a successor to Flintkote. The Sixth Circuit framed the question in two parts: 1) Can a successor company be liable for the unlawful employment practices of its predecessor; and 2) is it necessary for an employee to refile a charge to name the successor when that successor has notice of the original EEOC charge naming only the predecessor? (9)

The appellate court answered the first question directly: "We are of the view that the considerations set forth by the Supreme Court ... as justifying a successor doctrine to remedy unfair labor practices are applicable equally to remedy unfair employment practices in violation of Title VII. Each case, however, must be decided on its own facts." (10)

The Sixth Circuit indicated that a successor employer "may be a successor for some purposes and not for others" and a court should inquire into the facts of the case and balance the interests of the employee and employer with the particular legal obligation at issue before deciding whether a successor should inherit liability. (11) The need for a case-by-case determination of whether a successor inherits liability was repeated by the Sixth Circuit time and again. Despite this language, however, the Sixth Circuit indicated that as a general principle, the equities favor successor liability because the successor "benefits from the discriminatory practices" of its predecessor and that the primary concern is to provide the aggrieved employee with full relief. (12)

The Sixth Circuit set forth a list of nine considerations gleaned from earlier labor opinions that courts should consider when addressing the issue of successor liability in the context of Title VII claims:

1) Whether the new employer had notice of the charge or claim before acquisition of the business;

2) The ability of the predecessor to provide relief;

3) Whether there has been substantial continuity of the same business operations;

4) Whether the new employer uses the same plant;

5) Whether the new employer uses substantially the same workforce;

6) Whether the new employer uses substantially the same supervisory personnel;

7) Whether the same jobs exist under substantially similar working conditions;

8) Whether the new employer uses substantially the same machinery, equipment, and production methods; and

9) Whether the new employer produces or offers substantially the same product or service. (13)

In answering the second question framed by the MacMillan court, the court indicated that with respect to successor companies, Congress only intended that a charging party name those entities that were known to her and could have been charged within the limitations period. (14) However, because the record was clear that the successor MacMillan had notice of the employee's charge against the predecessor, the court did not decide whether successor liability would be appropriate if the successor had not been notified about the charge. This question was answered in subsequent Sixth Circuit opinions.

Post-MacMillan Modifications Concerning the Notice Factor

The Sixth Circuit followed its MacMillan decision with two opinions that modified the applicability of the successor liability factors enunciated in that case. Specifically, the Sixth Circuit reviewed and affirmed a district court's decision to refrain from applying the MacMillan factors in a class action alleging race discrimination under Title VII that was brought against a potential successor. (15)

The Sixth Circuit agreed that there was no evidence in the record that charges of employment discrimination had actually been filed by the plaintiff against the predecessor employer or that claims of employment discrimination were known to the potential successor entity at the time it acquired the predecessor. (16) The court indicated that such findings "remove this case from the rationale of MacMillan ... [and] [u]nder these circumstances, the District Court did not err in refusing to hold [the successor] liable for any unlawful discrimination which may have been practiced by [the predecessor]." (17)

Eight years later, the Sixth Circuit reaffirmed the foregoing holding in the context of a Title VII sexual harassment and gender discrimination claim. (18) In effect, the foregoing opinions removed the notice prong of the nine MacMillan factors from the balancing test and made it an initial hurdle that must be cleared before moving on to the balancing of the remaining factors. However, the Sixth Circuit later clarified that notice to the potential successor need not be actual and instead may be inferred under the circumstances. (19)

Although much focus has thus far been given to Sixth Circuit opinions given their influential role in successor liability jurisprudence over the past 30 years, it must be noted that to this day the U.S. Supreme Court has never expressly ruled that its successor liability reasoning articulated in Golden State applies outside of the NLRA context and in employment claims such as Title VII and other similar statutes. However, after the Sixth Circuit's opinion in MacMillan, virtually all circuits have assumed that it does. (20)

Although there appears to be near-uniform agreement among the circuits that a successor can be held liable for the discriminatory or retaliatory acts of a predecessor employer under a variety of different employment statutes, and that the nine MacMillan factors are the appropriate analytical touchstone, there have been recent developments in successor liability jurisprudence that have led to a circuit split.

The 11th Circuit's Coffman Approach Versus the Sixth Circuit's Cobb Approach

Some courts have indicated that there should be a distinct predicate factor considered before moving to the nine MacMillan factors when analyzing the propriety of imposing liability on a successor: namely, whether privity exists between the predecessor and successor. (21)

The 11th Circuit ruled in Coffman v. Chugach Support Services, Inc., 411 F.3d 1231 (11th Cir. 2005), that a plaintiff must show some kind of sale, merger, or other type of direct acquisition by a successor (i.e., "privity") before successor liability will be imposed. In Coffman, which was an employee reinstatement case under USERRA, the 11th Circuit stated unequivocally that the plaintiff must show "a merger or transfer of assets" between a predecessor and potential successor before successor liability could even conceivably be imposed. (22) The 11th Circuit based its holding primarily upon a World War II era reinstatement case arising under the Selective Training and Service Act of 1940. (23)

In Coffman, a serviceman returned from active duty to find that his former employer (predecessor) no longer had the contract to provide support services to a U.S. Air Force base, the contract having been awarded to another entity (potential successor). The 11th Circuit held that since there was no merger or transfer of assets between the former employer and the new service provider, there could be no successor liability imposed upon the new service provider in favor of the USERRA plaintiff. (24) Although the 11th Circuit did not specifically use the term "privity," the principle of law articulated in Coffman can be fairly summarized as "no privity = no successor liability."

The Sixth Circuit takes a different view. In mid-2006, the Sixth Circuit had occasion to revisit its MacMillan holding and address successor liability issues including the issue of whether a showing of privity between two employers is always a condition precedent to imposing successor liability.

In Cobb v. Contract Transport, Inc., 452 F.3d 543 (6th Cir. 2006), the plaintiff worked for a predecessor entity that provided contract mail delivery services for the U.S. Postal Service. This predecessor employer lost its contract with the Postal Service to a competitor through a bid process. Six months after being hired by the competitor, the plaintiff needed gallbladder surgery which necessitated a leave period of approximately two weeks. The competitor terminated the plaintiff which prompted him to bring an FMLA claim. (25) In order to meet the eligibility standards under the FMLA, (26) the plaintiff had to show that his most recent employer was a successor to his previous employer.

The district court granted the competitor's motion for summary judgment and indicated that it was "unnecessary and improper" to apply the FMLA's regulatory factors (27) (which closely mirror the nine MacMillan factors) to ascertain whether defendant was a successor in interest. Relying heavily on Coffman, the district court decided that there could be no "continuity of ownership and control" between the predecessor and the competitor due to the nature of the contract bid process and, therefore, no predecessor-successor relationship existed. (28) On appeal, the Sixth Circuit reversed the district court's decision finding that the competitor was a successor in interest, and stated significantly: "[W]e decline to hold ... that a merger or transfer of assets is always a precondition to successor liability." (29)

The court began with an overview of the FMLA and its implementing regulations and found evidence of congressional intent to adopt the doctrine of successor liability developed in federal labor law cases. (30) The court stated that since federal labor law cases do not require privity as a precondition to the imposition of successor liability, it would not impose such a requirement in the FMLA case at issue. (31)

The Sixth Circuit then re-examined the group of U.S. Supreme Court labor cases that addressed successor liability and reviewed its own holding in MacMillan, focusing on the legal duties that were at issue in each case. (32) In effect, the court in Cobb de-emphasized the familiar MacMillan nine-factor analytical balancing test and instead announced that an overriding three-prong balancing test that had been discussed in MacMillan was the more appropriate analytical touchstone. Specifically, the Cobb court stated that the question of whether the imposition of successor liability is equitable in a particular case requires courts to balance the interests of the defendant employer; interests of the plaintiff employee; and goals of federal policy in light of the particular facts of a case and the particular legal obligation at issue. (33)

The Cobb court continued by stating:

The nine factors [in MacMillan] ... are not in themselves the test for successor liability. Instead, the nine factors are simply factors courts have considered when applying the three prong balancing approach, considering the defendant's interests, the plaintiff 's interests, and federal policy ... [A]ll nine factors will not be applicable to each case. Whether a particular factor is relevant depends upon the legal obligation at issue in the case. The ultimate inquiry always remains whether the imposition of the particular legal obligation at issue would be equitable and in keeping with federal policy. (34)

This pronouncement, depending on one's perspective, modifies, clarifies, or redirects the focus of inquiry for courts and litigants when faced with successor liability questions in the context of labor and employment cases. The Sixth Circuit has now expressly indicated that in each case where the question of successor liability is in play, a court (at least in its circuit) must divine the specific legal obligation or duty at issue, balance that duty with the other two primary analytic factors (the employer's and employee's interests), use the nine secondary factors of MacMillan, if appropriate, to help formulate the proper inquiry and then decide as a matter of equity whether successor liability should be imposed.

The Sixth Circuit then directly addressed the question of whether privity must always be shown as a condition precedent to imposing successor liability. In answering the question in the negative as to the FMLA claim at issue, the court indicated that privity is not always a precondition to successor liability but that under some circumstances it would be appropriate to consider that factor. (35) Such circumstances may arise when a court is addressing whether imposing successor liability is equitable in the context of liability for past discrimination or unfair labor practices of a predecessor because the value of the predecessor's assets is presumed to have increased from the illegal conduct of the predecessor which would benefit a successor. The successor, assuming it has notice of the past activity, would then be able to negotiate a lower purchase price or indemnity clause to protect itself from a potential plaintiff's future claim. (36)

The Sixth Circuit went on to criticize the 11th Circuit's holding in Coffman. The Sixth Circuit believed that the 11th Circuit relied on outdated case law that was decided before the panoply of controlling U.S. Supreme Court labor cases that specifically addressed successor liability issues. (37)

As such, the Sixth Circuit held that the duty of an employer to grant leave or reinstate an employee at the conclusion of that leave arises under the FMLA statute itself and the source of that duty has no apparent relationship to a company's physical assets; therefore, there is no reason to consider whether a merger or transfer of assets occurred as a precondition to the imposition of the statutory duty upon a successor. (38) While the Sixth Circuit did not explicitly say so, the fact that the duty allegedly violated was that of the successor employer rather than the predecessor, almost certainly played some role in the balancing analysis.

The principle that emerges from Cobb is that privity can be a relevant factor to consider when confronting claims that include requests for relief for past discrimination, retaliation, or unfair labor practice, but in cases where an independent statutory duty exists that has no connection to a company's assets, the absence of privity will not preclude the imposition of successor liability.

Conclusion

The Coffman and Cobb holdings will surely impact future successor liability analysis as courts grapple with identifying the particular legal duty in labor and employment claims and balance that duty with the employer's and employee's interests along with the privity and notice issues and the remaining MacMillan factors. Whether the Cobb decision, which may have the effect of subordinating the MacMillan nine-factor test in favor of the three-primary-factors test, is a precursor to a sea of change in the focus and application of analytical factors in successor liability jurisprudence remains to be seen.

(1) Upholsterers' Int'l Union Pension Fund v. Artistic Furniture of Pontiac, 920 F.2d 1323, 1325 (7th Cir. 1990), quoting EEOC v. Vucitech, 842 F.2d 936, 944 (7th Cir. 1988).

(2) John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543 (1964); NLRB v. Burns International Security, 406 U.S. 272 (1972); Golden State Bottling Co., Inc. v. National Labor Relations Board, 414 U.S. 168 (1973); Howard Johnson Co. v. Detroit Local Joint Exec. Bd., Hotel & Rest. Employees Int'l Union, 417 U.S. 249 (1974).

(3) Golden State, 414 U.S. at 172.

(4) Id. at 180.

(5) Id.

(6) Id. at 185.

(7) MacMillan, 503 F.2d at 1088.

(8) Id. at 1089.

(9) Id.

(10) Id. at 1090-91.

(11) Id. at 1091.

(12) Id. at 1092.

(13) Id. at 1094.

(14) Id. at 1093.

(15) Wiggins v. Spector Freight System, Inc., 583 F.2d 882, 886 (6th Cir. 1978).

(16) Id.

(17) Id.

(18) Rabidue v. Osceola Refining Company, a Division of Texas-American Petrochemicals, Inc., 805 F.2d 611, 616 (6th Cir. 1986), overruled on other grounds, Harris v. Forklift Systems, Inc., 510 U.S. 17 (1993).

(19) NLRB v. South Harlan Coal, Inc., 844 F.2d 380, 385-386 (6th Cir. 1988).

(20) See, e.g., Forde v. Kee Lox Mfg. Co., Inc., 584 F.2d 4 (2d Cir. 1978); Rego v. ARC Water Treatment Co. of Pa., 181 F.3d 396 (3d Cir. 1999); Rojas v. TK Communications, Inc., 87 F.3d 745 (5th Cir. 1996); EEOC v. G-K-G, Inc., 39 F.3d 740 (7th Cir. 1994); Dominguez v. Hotel, Motel, Restaurant & Miscell. Bartenders Union, 674 F.2d 732 (8th Cir. 1982); Slack v. Havens, 522 F.2d 1091 (9th Cir. 1975); Trujillo v. Longhorn Mfg. Co., Inc., 694 F.2d 221 (10th Cir. 1982); In re National Airlines, Inc., 700 F.2d 695 (11th Cir. 1983).

(21) Korlin v. Chartwell Health Care, Inc., 128 F. Supp. 2d 609, 614 (E.D. Mo. 2001); Whitmore v. O'Connor Management, Inc., 156 F.3d 796, 799 (8th Cir. 1998).

(22) Coffman, 411 F.3d 1231, 1237-1238.

(23) Kicinski v. Constable Hook Shipyard, 168 F.2d 404, 408-09 (3d Cir. 1948)(A nurse returning from active duty sought reinstatement at the shipyard where she worked before entering military service, but during her absence, her former employer vacated the shipyard; thereafter, the yard was taken in condemnation proceedings and, after ending up in the possession of a bankruptcy trustee, was leased to a different shipbuilder a few weeks later. Third Circuit found that potential successor had no obligation to re-employ nurse since there was no "continuity or privity" between the two shipbuilding entities).

(24) Coffman, 411 F.3d at 1237-1238.

(25) Cobb, 452 F.3d at 547-548.

(26) See 29 U.S.C. [section] 2611(2)(A).

(27) See 29 C.F.R. [section] 825.107.

(28) Cobb v. Contract Transport, Inc., 2005 WL 1645733 (E.D. Ky. 2005)(reversed).

(29) Cobb, 452 F.3d at 551.

(30) Id.

(31) Id.

(32) Id. at 552-555.

(33) Id. at 552, 554-555, citing MacMillan, 503 F.2d at 1091.

(34) Id. at 554.

(35) Id. at 555-556.

(36) Id.

(37) Id.

(38) Id. at 557.

Travis R. Hollifield is the founder of Hollifield Legal Centre in Winter Park which focuses on working women's legal rights including FMLA, sexual harassment, and pregnancy discrimination claims. He earned his B.A. from the University of Central Florida in 1991 and his J.D. from Nova Southeastern University in 1996. Mr. Hollifield is a member of the Labor & Employment Law Section of The Florida Bar, the Federal Bar Association, and the National and Florida Employment Lawyers associations.

This column is submitted on behalf of the Labor and Employment Law Section, Cynthia Sass, chair, and Frank E. Brown, editor.
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Author:Hollifield, Travis R.
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Date:Jan 1, 2007
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